Australias Bilateral Trade Relations - Example

Australia’s bilateral trade relations (Name) (Institution) (Course name) (Course code) (Module) (Instructor’s Name) Date of submission Introduction Australia has been a major player in global trade for a long time. Impressive economic performance has created production capabilities and also enhanced aggregate demand. Conventionally, the UK, US and Canada are the major trade partners with Australia. In the recent past, the country has explored other markets from emerging economies more so in Asia. These new trade relations have enhanced diversity in trade and created even newer industries. Such trade relations are established either between two countries or among a number of countries. The growth of these trade relations has been boosted and also undermined by events in the global arena. This paper discusses Australia’s trade relations with China one of its major trading partner and Thailand which is one of its minor trading partners. Sino-Australia trade relations China is the 3rd largest country in the world with a population exceeding 1.3 billion people occupying a total land area of 9,596,960 sq km. Australia on the other hand is 20% lesser than China in land area with a relatively low population of just over 21.8 million people when compared to its land area. These two countries have in the recent past become great trading partners that they are considering a free trade agreement to facilitate more trade (DFAT 2011; WTO 2011). Both countries are net importers (WTO 2011). China mainly exports manufactured products such as garments, electronics, telecommunication equipments and automobiles to the rest of the world while Australia mainly exports energy and mining products, agricultural products as well as services such as tourism and education (DFAT 2011). According to the 2006 IMF ranking of global economies, China was ranked 4th in the world and Australia 12th. The diplomatic relationship between Australia and China on trade and commercial terms has grown rapidly over the years since the signing of a trade agreement between the two governments in 1973. This agreement has been the basis of all other succeeding trade and diplomatic relations between the two countries (Vigfusdottir 2008). While cultural, military political and social interactions have grown, trade has taken centre stage. The growth in trade relations has been spurred by economic developments in either country and also events in the global arena. Australian corporations are keen on exploiting the large Chinese market while Chinese firms are keen on marketing their products abroad. 1970’s This cold war period was not conducive for business between US allies and Soviet allies. With China leaning towards the Soviet Union and Australia leaning towards the US, diplomatic relations were not most welcome. Socialist countries advocated for trade relations amongst themselves. However, the quest for economic growth and prosperity overcame political correctness with China and Australia leading the way. Partial liberalisation of China in the 1970’s allowed China to open up to trade with foreign countries. Immediately after this liberalisation, China economy registered very positive results. Demurger (2000) thus links the reformation of China into a market economy as the precursor to international trade by China. Prior to this liberalisation, China had been despised by the west due to its communist political system. The country was often accused of perpetrating human rights injustices on its people and repressed freedom of the press. Democracy according to western countries was a rare commodity in China. Many industries in China were highly regulated by the communist government and employees worked in inhuman conditions. Motivated by the prospects in the large Chinese market, some west-based corporations used a variety of machinations to compel China to open up its borders to foreign players. The response was immediate but an internal need to exploit the global market also motivated China to introduce further economic reforms. 1980’s By the 1980’s, China had realised the benefits that lay in foreign trade relations. As such, the country was pressing hard for admission into the WTO. The US led other nations in resisting this move accusing China of democracy suppression. The issue of Taiwan which China claimed was part of its territory was pushing for its independence. The US supported the independence of Taiwan. This diplomatic row between China and the US forced many allies of the US to keep relations with China on the minimum. This implied that bilateral trade between China and Australia grew at minimal rates. Pingyan (2009) notes that the trade grew in value from US$ 1.14 billion in 1979 to US$ 1.55 billion in 1989. In 1988-89 Australian exports were mainly to Asia with Japan leading at 24.6% of all exports with China taking a paltry 2.6% due to the strict protectionist policies by China. Australian imports on the other hand were mainly from Japan at 17.5% of the total with only 1.8% being sourced from China (DFAT 2011). 1990’s Global economic prosperity allowed china to boost her export manufacturing industry as demand grew. Prior to 1993, Taiwan, Singapore, S. Korea and Hong Kong were main the exporters to Australia. In fact, China was the ranked sixth largest exporter to Australia (ABS 2011). However, with time, the bilateral trade between the two grew tremendously spurred by economic prosperity of China. To put it into perspective, trade grew from US$1.61 billion in 1990 to US$6.31 billion in 1999, an increase of approximately 300% (Pingyan 2009). However, in the early 1990’s Australia’s share of the Chinese and Hong Kong import market slipped from 3.5% to 2.9%. On the contrary, the exports from these two countries increased indicating the growing importance of Australia as Hong Kong’s and China’s export market. The growth of the global services market in the 1990’s had a bearing on Sino-Australian bilateral trade. The share of services in Australian total exports grew from 18% in 1980 to 22% by 1994. This growth in the Australian services industry challenged the dominant agricultural and mineral resources industries which dominated Australian exports. The EU, US and ASEAN members accounted for 45% of all Australia’s services exports. China and Hong Kong accounted for 6.1% surpassed by Japan at 19%. The share of greater China was however larger at 22.1% (Pingyan 2009). The main services included travel/tourism and education services, more so higher education. However, in 1992, the Australian government placed restriction on the export of education services through stricter visa requirements for Chinese students willing to travel to Australia. In this period also, China and Australia registered tremendous growth in inward and outward foreign direct investments (FDI). According to China’s MOFTEC statistics, Australia was the second most popular destination for Chinas FDI outflow after Canada. By the end of 1993 according to the Australia bureau of statistics, China’s FDI projects in Australia were worth US$ 333 million. China’s FDI destination was directed to developed and developed countries with little to none in less developed country. The same trend was observable in Australia where some FDI recipients were also developed and developing countries (Bridges 1997; ABS 2011). 21st century This century in the context of trade was marked by three major developments; 1) the September 11 terrorist attack in the US and the subsequent terror wars in Iraq and Afghanistan, 2) China joining the World Trade Organization in 2001 and 3) the global financial crisis. The September 11 attack and the terror war allowed China to play a more prominent role in global affairs given that the US and her allies such as the UK, Canada and France were deeply engrossed in the war. Foreign direct investments from these countries into other countries slackened. Resources were diverted into the war. China on the other hand continued to play her role as a rising power in global affairs. The presumed underrepresentation of US as the leader of global trade was a growth opportunity for China. Many MNC’s outsourced manufacturing services from China through FDI. While there is no direct evidence to link the terror and trade, the reduced participation and influence of the US on global trade in this period allowed China to gain more recognition on the global platform as the trade partner of choice for many countries Australia included. As such, Australia increased her trade with China at the cost of the trade with the US (World Bank 2011). In 2008-09, 15.9% of Australian exports were to China. Imports also marked increased trade between China and Australia with 13.8% of the total coming from China with 19.2% coming from ASEAN members in the same year (DFAT 2011). China’s admission into the WTO has far reaching effects on the Australia and china bilateral trade. The admission into the global body called for further opening up of China’s borders to foreign players. The move also called for drastic reduction in tariffs, non tariff barriers among other reforms that would give international players access to the vast Chinese market. Experts in global trade argued differently in reference to by this move (Sherlock 2002). On one side, some spectators argued that the move would benefit China’s trading partners such as Australia and the US. On the other hand, there was an argument that the Chinese government would be faced with enormous challenges in maintaining an economy whose growth has been largely powered by the domestic market. Most notably would be the stiff competition that would face inefficient state owned corporations (Demurger 2000). In order to face anticipated competition from foreign new comers, China was forced to privatise further and remove monopolies in some industries. China’s accession to the WTO provided a better institutional framework for bilateral trade with Australia and other countries. As of 2006, China was the second largest export market for Australia with exports of over US$15.41 billion out of the total US$ 34.65 billion worth of exports (WTO 2011; Yongding 2010). In the same year, Australian imports grew substantially with US$19.24 billion worth of imports coming from China. The accession of China had other implications for the bilateral trade between the two countries. The most prominent was a clause that made China agree to the fact that Taiwan would be allowed to join independently. Taiwan and China export the same type of products into Australia. As such, Taiwan’s accession to WTO could provide a more level competing ground for China and Taiwan in Australia’s export market. The 2008/09 global financial crisis brought global trade to all time since the Second World War according to WTO (2011) the crisis and consequent global recession reduced global exports by a whooping 9% while de eloping countries registered a more severe decline at 10% reduction in exports for year 2009. The effect was most felt by manufacturing oriented countries especially in Asia as the recession prompted a fall in aggregate demand worldwide. The growth in global output decreased from 3.5% in 2007 to 1-2% in 2009 (WTO 2011). The economies China and Australia were not adversely affected by the global recession. However, given that both countries are net exporters there was definite fall in export earnings from other markets. Australia Thailand Thailand is the 50th largest country in the world located in south East Asia with a total land area of approximately 513,000 km2 with a population of over 61 million people making it the 21st most populous nation (DFAT, 2011). From 1985 to 1996 the country recorded very impressive economic growth averaging 9.4% annually and afterward slumping to recession affecting Asian countries in 1997. This economic prosperity accelerated the country at the front of global trade and is now recognised as a newly industrialised state. By 2010 estimates, the country’s economy ranked 24th in the world a GDP of US$ 573.6 billion. With such a strong economy, it shows that the country has enough resources to produce surplus goods and services for export and also an economically empowered state that can import from other countries among them Australia. Australia and Thailand share a range of political and economic interests which provides a foundation for trade relations. Their most basic trade relationship is based on their common membership to the bilateral trading block ASEAN. Other members of this block are Malaysia, Indonesia, Philippines Singapore and Brunei (ABS 2011). However, the Australian government reckons that bilateral trade relationships are easier to negotiate and implement than multilateral agreements (Bargami, 2007). Such bilateral relations between Thailand and Australia are based on defence cooperation, tourism, narcotics control, refugee resettlement and trade which is the most prominent and important. The trade volume between Thailand and Australia is relatively low compared to other bilateral trade relations such as with China. Australia’s exports to Thailand were worth US$ 1.6 billion in 2006 accounting for only 1.8% of total exports. On the other hand, Thailand’s exports into Australia were worth US$ 2.0 billion in the same year (see appendix A). The trade relations between Thailand and Australia have in the past remained minimal with scarce records of trade between the two in the 1980’s. Fast forward into the 1990s and the present time and trade volume increased tremendously. Majority Australian exports into Thailand are raw materials used in various manufacturing processes. Australia’s imports from Thailand are dominated by manufactured goods. These goods include goods and passenger motor vehicles, heating and cooling equipment and gold. In 2007, these imports were worth US$ 4.2 billion as oppose to exports to Thailand worth US$ .5 billion in the same year. Thailand exports also comprise telecommunication equipments, canned seafood, jewellery and household appliances. Between 2002 and 2007, the growth in Thailand’s consumer goods exports into Australia grew at an average of 22% annually (DFAT 2011). In the 1990’s, Thailand’s economy was performing extremely well in a way to increase aggregate domestic demand and also see a rise in production into surplus. The changes in Thailand’s economic performance are the greatest attributes to the development of bilateral trade between the two nations as afar as Thailand alone is concerned. In the mid 1990’s Thailand’s inflation rate was relatively stable and was registering a gradual decrease as shown by a decrease from 5.8 % in 1995 to 5.65% in 1997. Between 2003 and 2005, inflation rate fluctuated from 0.2% to 1.6%. However total debts increased significantly from US$100,039 million in 1995 to US$ 109,276 millions in 1997 due to the Asia financial crisis and the domestic currency devaluation. In 2005, the debt declined to US$ 52,040 million in 2005 because of the repayment of IMF loan. The Asia financial crisis and the country’s float system however led to further devaluation of the Thai bath. Unemployment in this period ranged from 3.8% to 5% (Theeravit n.d.). Prior to 2005, the trade bilateral trade between Thailand and Australia was hindered by harsh tariffs and labour immobility motivated by the need to protect their domestic industries. For instance, Thailand placed a 51% tariff on imported beef, pork at 32%, mutton at 33% and fruits and vegetables at 27-42%. Australia on the other hand also placed relatively lenient tariffs on imports from Thailand. In fact, 36% of Thailand exports entered Australia duty free. These tariffs are viewed by trade experts and economists as barriers to international trade (Wattanakul 2010). However, economists also recognise that tariffs as some of the protectionist polices effected by governments allows domestic industries to grow before foreign competitors can be allowed freely into the market. This alone goes a long way in explaining the minimal trade between Australia and Thailand until a time where Thailand’s domestic industries could handle competition. As such, Thailand’s economic growth was a prerequisite for Australia Thailand bilateral trade (Theeravit n.d.). The TAFTA The Thailand Australia Free Trade Agreement came into effect in January 1st 2005. This agreement gave Australia more access into the Thailand market. Courtesy of the agreement, over 5000 tariffs were eliminated (Bargami 2007; DFAT 2007). As far as the bilateral trade between these two countries go, Thailand is a net exporter therefore making the bilateral trade relatively more important to Thailand than it is for Australia. Nonetheless, in recognition of the need to protect local industries, both countries have placed quotas on selected agricultural outputs. The agreement has however faced tooting problems with Thailand showing signs of maintaining strict visa requirements and work permits for Australian expatriates working in Thailand. However, the issues were later resolved. The introduction of TAFTA boosted the volume of bilateral trade between the two countries. In the first year, 2005 the amount of trade doubled to hit $12.5 billion year on year growth. Australian merchandise exports to Thailand increased by 36% before falling to 4% in 2006 and 3% in 2007 (Bargami 2007; Jiranyakul & Brahmasrene n.d.). However, this declining increase in Australian exports was larger than the growth of Thailand’s exports into Australia. This growth is supported by the high number of new export license applications and increase in the number of Australian firms registered as exporters. Furthermore, the impact of TAFTA is captured by the growth in diversity of exports in both directions. Prior to enactment of the FTA, Australian exports into Thailand were categorised into 2500 tariff lines which later grew to 2850 tariff lines (Bargami 2007; DFAT 2011). Additional products that Australia exported after the FTA include some medicines, auto parts and steel and aluminium products. References Bargami, R. (2007). The Thailand-Australia Free Trade Agreement (TAFTA) Regulations and Procedures Department of Foreign Affairs and Trade, Commonwealth of Australia. Retrieved online from on 22/04/2011 from, http://www.dfat.gov.au International Monetary Fund. Retrieved online from on 22/04/2011 from, http://www.imf.org Jiranyakul, K. & Brahmasrene, T. (n.d.). An analysis of the determinants of Thailand’s exports and imports with major trading partners. Retrieved online from on 22/04/2011 from, www.ecomod.org/files/papers/644.doc Mackerras, C. (2004). Australia’s relations with china in the context of globalization. The ninth international conference on Australian studies, Xuzhou, Jiangsu province, China November 2004. Retrieved online from on 22/04/2011 from, http://www98.griffith.edu.au/dspace/bitstream/10072/11462/1/AustChinaGlobalization.pdf Pingyan (2009). The Policy Advices for China-Australia Free Trade Agreement Negotiations. Journal of International Relations. http://www.focusire.com/archives/242.html Sherlock, S. (2002). China’s admission to the World Trade Organization (WTO): What does it mean? Who will/won't benefit? Retrieved online from on 22/04/2011 from, http://www.aph.gov.au/library/pubs/rn/2001-02/02rn24.htm Theeravit, K. (n.d.). Australian-Thai Relations: A Thai Perspective. Retrieved online from on 22/04/2011 from, http://www.dfat.gov.au/publications/stats-pubs/australias-trade-performance-1988-89-to-2008-09.pdf Tradeport. Retrieved online from on 22/04/2011 from, http://www.tradeport.org The Word Bank Group. Retrieved online from on 22/04/2011 from, http://www.worldbank.org The United Nations. Retrieved online from on 22/04/2011 from, http://www.unctad.org Vigfusdottir, H. 2008. A free trade agreement between Australia and china. Retrieved online from on 22/04/2011 from, http://skemman.is/stream/get/1946/3327/10434/1/Heidur_Vigfusdottir_fixed.pdf Mackerras, C. (2004). Australia’s relations with china in the context of globalization. The ninth international conference on Australian studies, Xuzhou, Jiangsu province, China November 2004. Retrieved online from on 22/04/2011 from, http://www98.griffith.edu.au/dspace/bitstream/10072/11462/1/AustChinaGlobalization.pdf Pingyan (2009). The Policy Advices for China-Australia Free Trade Agreement Negotiations. Journal of International Relations. http://www.focusire.com/archives/242.html Wattanakul, T. (2010). Australia’s trade performance 1988-89 to 2008-09. Retrieved online from on 22/04/2011 from, www.ecomod.org/files/papers/644.doc Yongding, Y. (2010). The impact of the global financial crisis on the Chinese economy and China’s policy responses. Retrieved online from on 22/04/2011 from, http://www.twnside.org.sg/title2/ge/ge25.pdf. Appendices Appendix A Relative significance of bilateral trade between Australia and Thailand Source: http://www.thailawforum.com/articles/thai-aus-fta.html Read More